Japan Data Science ConsortiumLtd (TSE:4418) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Japan Data Science Consortium Co.Ltd. (TSE:4418) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Japan Data Science ConsortiumLtd

What Is Japan Data Science ConsortiumLtd's Net Debt?

As you can see below, Japan Data Science ConsortiumLtd had JP¥1.58b of debt at September 2024, down from JP¥1.77b a year prior. However, its balance sheet shows it holds JP¥2.34b in cash, so it actually has JP¥758.0m net cash.

A Look At Japan Data Science ConsortiumLtd's Liabilities

The latest balance sheet data shows that Japan Data Science ConsortiumLtd had liabilities of JP¥2.22b due within a year, and liabilities of JP¥1.75b falling due after that. On the other hand, it had cash of JP¥2.34b and JP¥2.69b worth of receivables due within a year. So it can boast JP¥1.06b more liquid assets than total liabilities.

This surplus suggests that Japan Data Science ConsortiumLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Japan Data Science ConsortiumLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Japan Data Science ConsortiumLtd grew its EBIT by 793% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Japan Data Science ConsortiumLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Japan Data Science ConsortiumLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Japan Data Science ConsortiumLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Japan Data Science ConsortiumLtd has JP¥758.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 793% over the last year. So we are not troubled with Japan Data Science ConsortiumLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Japan Data Science ConsortiumLtd you should be aware of, and 1 of them doesn't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.